Currently, the federal government and states share in all costs associated with running the Medicaid program. Capping federal funding would require states to make tough decisions about whether to increase their own spending to make up the lost federal share or to cut back on coverage, benefits and access to keep spending within the cap.

Medicaid provides critical healthcare and long-term services and supports (LTSS) to 73 million people, including the most vulnerable members of our society. A fundamental redesign of Medicaid financing puts the health and well-being of these individuals in jeopardy.

Financing Medicaid

Since Medicaid was established in 1965, the federal government and the states have shared responsibility for financing the program, with the federal government providing a legal commitment to match state spending on authorized program costs, including medical care, LTSS and administrative expenses. For most Medicaid spending, the federal share is determined by each state’s federal medical assistance percentage (or matching rate). States with lower relative per capita incomes receive higher matching rates (and vice versa). States also receive different matching rates for administration and certain benefits and populations.

Shared financing of Medicaid costs provides states, beneficiaries and healthcare providers with protection against fluctuations in spending and enrollment. If costs spike due to the introduction of an expensive new drug or Medicaid enrollment increases due to an economic downturn, the federal government is still responsible for its share of allowable program costs, and increases in state costs would be mitigated by the federal financial commitment.

Capped Funding Proposals

Capping federal Medicaid funding would undo the federal government’s commitment to share in all allowable costs of operating the Medicaid program.  Proposals to cap federal Medicaid funding generally have taken two approaches that are not mutually exclusive.

1. Block grants. Block grants generally provide states with a set amount of federal funding each year, regardless of actual program costs and enrollment. They are attractive to some lawmakers because they provide a high degree of budget certainty to the federal government. Historically, block grant proposals have allowed capped payments to grow each year based on a national trend rate (such as inflation)—and may or may not have a state spending requirement.
2. Per capita caps. Per capita cap proposals vary, but they all cap the amount of federal spending on Medicaid on a per-person basis, with the amount of federal funding available to a state depending on the number of individuals enrolled. In most proposals, per capita caps are set based on state spending in an earlier period, trended forward by a national trend rate.

Both block grants and per capita caps have been included in several different proposals advanced by Republicans over the past several years, including Graham-Cassidy, which remains the Republicans’ preferred approach to capping Medicaid funding, despite the Senate’s decision in 2017 to call off a vote rather than risk defeat. Graham-Cassidy contains many of the same features as earlier proposals—the American Health Care Act (AHCA) and the Better Care Reconciliation Act (BRCA)—including a per capita cap on most federal Medicaid spending (although with slightly different trend rates for certain groups) and an aggregate cap relating to most program spending. However, instead of phasing down the enhanced match for expansion results, as previous proposals did, Graham-Cassidy proposed to eliminate the Medicaid expansion and the health insurance marketplace and divert funding to a block grant for states, with broad flexibility in how states could use their block grant funds.

Implications of Capped Funding

All major capped funding proposals to date would lead to large cuts in Medicaid spending. In addition to cuts that can be projected based on Medicaid spending estimates, capped funding creates additional risks to Medicaid programs that are difficult to measure. For example, caps typically are set based on historic spending, Therefore, a state with a low spending base will have little ability in the future to draw down additional federal dollars to improve access or benefits.

In addition, under capped funding proposals, states, providers and ultimately patients—not the federal government—bear the risk of unexpected costs, such as public health crises, natural and man-made disasters, and expensive breakthrough treatments. Trend rates are also problematic, as they do not reflect the key drivers of Medicaid costs (such as nursing home care) and can fluctuate from year to year. Adding to these risks, block grants typically do not adjust allotments to account for spikes in enrollment, which can be caused by economic downturns, natural disasters and many other factors.

Potential Impact on Federal Funding

Using the Manatt Medicaid Financing Model, we found that the Graham-Cassidy proposal would result in substantial cuts in federal Medicaid funding for states. Between 2020 and 2026:

• The loss of federal funding for expansion alone would result in a 21.6% reduction ($718.1 billion) in federal Medicaid spending nationwide.
• Per capita caps would result in an additional 4% decrease ($132.6 billion), with cuts deepening to 6.1% by 2026.
• In total, states would see a cut of 25.6% ($850.7 billion) in federal Medicaid dollars.

These estimates are in line with the Congressional Budget Office’s analysis, showing Graham-Cassidy would reduce federal spending on Medicaid by about $1 trillion between 2017 and 2026.

The federal cuts could be deepened by reductions in state Medicaid funding. To backfill lost federal dollars, states would need to come up with an additional $132.6 billion over the 2020–2026 period. Rather than backfilling, many states may choose to spend only what is required to receive the full amount of federal payments allowed under the cap. If all states took this approach, combined state and federal cuts attributable to the Graham-Cassidy per capita cap would total $229.9 billion between 2020 and 2026.

Conclusion

By shifting risk to state Medicaid programs, providers and enrollees, capped funding brings budget certainty—and likely savings—to the federal government. To the extent that caps cause federal funding to fall short of actual need, states would have to decide whether to replace lost federal funds or cut program spending. For states that do not backfill, capped funding is likely to have an outsized impact on high-cost beneficiaries, such as the elderly and disabled, who account for more than 60% of Medicaid spending. Exacerbating the problem is the fact that elderly and disabled populations are responsible for a large share of optional Medicaid spending (77% in FY 2013), which is where states have more opportunities under federal law to reduce spending.

The president and lawmakers continue to show interest in capped funding. If caps are imposed, most states would have little choice but to make substantial cuts to their existing programs, putting all those whom Medicaid serves in jeopardy.